Business Loan: 5 Secrets to Potential Approval with Fair Credit

What Fair Credit Means for Business Owners

Many lenders require borrowers to meet minimum credit score requirements and have a personal guarantee. If you don’t meet those requirements, it can feel challenging to get a business loan today.

FICO credit scores are three digits, from 300 to 850, and are used by a range of lenders to assess your creditworthiness. In this range, scores are broken down into groups, including “fair.”

For example, according to FICO, a credit score of 800+ is “exceptional,” while scores between 740-799 are “very good,” and 670-739 are “good.” Below good, you’ll find “fair” credit scores between 580 and 669. Anything below 580 is considered “poor.” While this is a solid benchmark, it’s important to note that some lenders may use different credit scoring models.

Business lenders may review both personal credit and business credit. So, if you haven’t established business credit yet and have a fair personal credit score, getting a loan can be difficult.

Why You May Still Get a Business Loan Today with Fair Credit

Fair credit may not open all doors, but it doesn’t mean you can’t get a business loan today. While many traditional lenders rely heavily on credit scores, fintech lenders often place emphasis on other factors like revenue, transaction history, time in business, and cash flow.

These lenders may also offer faster decisions and a smoother application process. If you have fair credit, there are ways you can improve your chances of approval.

5 Secrets to Possible Approval with Fair Credit

Having fair credit can feel discouraging if you see minimum credit score requirements that you don’t meet. But there are some ways that you can increase approval odds, even with fair credit.

1. Focus on Cash Flow

If you have fair credit, you still have a shot of getting a business loan today. While credit history is often one of the key factors that lenders look at, it’s not everything for all lenders.

Some online or alternative lenders may use a different set of criteria to assess eligibility. These lenders may use what is called “alternative data,” which refers to other financial metrics aside from credit. For example:

• Bank transactions
• Rent payments
• Utility payments
• Education
• Social media

So, if you have a fair credit score, one of the best things you can do is focus on cash flow. Make sure that revenue is coming in and that your transaction history doesn’t have any red flags.

Lenders look at your financial health when assessing default risk. Showing a strong cash flow position may help your application if your credit score is less than perfect.

2. Use Collateral

If you’re worried that fair credit could decrease your approval odds, there’s something you can do to improve your chances: use collateral.

Assets, such as savings, real estate, equipment, and inventory, can help secure the loan as a form of collateral. If you don’t meet your payment obligations and wind up in default, lenders can take legal action and seize the collateral.

Once there’s an asset backing the loan, lenders may have the reassurance they need as there is something to fall back on. Some lenders and loan types may allow for collateral, which could help your application.

3. Apply for the Right Types of Small Business Loans

To get a business loan today with fair credit, it’s essential to apply for the right type of small business financing.

Some options may be inherently better for borrowers with fair credit. For example, equipment financing can be appealing as it has built-in collateral. When you apply for an equipment loan or lease, the item is the collateral.

Small business owners can also research lenders that may offer traditional business loans, designed for borrowers who don’t have perfect credit.

4. Gather Solid Documentation

Your credit score is powerful because it instantly gives lenders a snapshot of your credit history. It’s convenient, quick, and useful. But if your fair credit doesn’t instantly help you, you can prepare your application documentation to support your case.

Lenders still want to know that you have a valid business, you can repay the loan, and you can comfortably afford the monthly payments. As a result, it’s key to gather documentation to show proof of ownership and income. Some documents that you may need include:

• Your Employer Identification Number (EIN)

• Business plan

• Bank statements from your business bank account
• Tax returns
• Profit and loss statements

• Cash flow statements

• Sales history
• Balance sheet
• Business license
• Permits
• Contracts

Anything that can help your application may make it easier to get a business loan today, instead of in the future.

5. Get Prequalified

Getting business funding can seem like a challenge with fair credit. You might not qualify for all types of business loans. However, other options are available. To help you get a business loan today, one of the smartest moves to make is to see if you can get prequalified.

If you already have fair credit, the last thing you want to do is go through the full application process, get rejected, and have a hard credit check. That inquiry could lead to a potential drop in credit score.

You’ll get an initial estimate showing potential interest rates and repayment terms. During this process, there’s generally only a soft credit pull, which won’t impact your credit score. Lenders base this on limited information though, so they still have the right to decline you after the prequalification process. But it can give you a better sense of where you stand.

Typically, you can get prequalified with certain online lenders. But not all lenders may offer this.

Prequalification can help you effectively compare business loan options and lenders, without a ding on your credit score.

Tips to Increase Your Approval Odds

Using the above five tips, you can enhance your chances of getting approved for financing. Some other ways you can increase your approval odds include:

• Keep it separate: Lenders want personal and business assets and expenses to be separate. If you’re a new startup, you might not have gone through the process yet. Start by opening a business checking account for transactions, a business savings account for taxes and future purchases.

• Pay down debt: Debt-to-income ratio (DTI) is another metric that lenders review as part of your application. If the percentage is high, it may be a warning sign for lenders. Lowering your balances could help your application.

• Maintain good records: Getting a business loan today is easier than ever, thanks to online lenders and plenty of options. Still, you must provide the required documentation to be approved. Maintaining good records can help tell lenders a story about your business that your credit score can’t.

• Boost credit scores: Improving your personal credit score and establishing business credit may help. FICO credit scores use five factors for your personal credit score, which include payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%). You may also consider a secured business credit card to slowly build business credit.

Final Thoughts

Your FICO credit score can carry a lot of weight in business lending. But just because you have fair credit doesn’t mean you won’t have any options. Specific types of loans or specialized lenders may work with borrowers like you. So, if you need to get a business loan today, use these tips to move forward and get financing to support your company’s goals.